2 banks to buy and one bank to sell for 2017

During 2016, bank stocks were taken on a roller coaster ride as interest rates plunged and then rallied towards the end of the year. And after ending 2016 on a high note, banks are well placed to extend their gains into 2017.

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However, some banks are better positioned for growth than others. Indeed, challenger businesses such as Metro Bank(LSE: MTRO) and Close Brothers(LSE: CBG) continue to roll out to new customers while larger players such as Barclays(LSE: BARC) are still pruning their offering and exiting markets where profits are falling.

Growth ahead

The challengers' continued expansion gives them a huge growth advantage over shrinking larger peers.

For example, Metro Bank reported at the end of last year that its assets had surpassed £10bn and the number of customer accounts has exceeded 900,000. This has been achieved less than six-and-a-half years after its launch in July 2010. Metro plans to open another 12 branches this year and hire a further 500 staff bringing its headcount to 3,000 and branch count to 60.

Meanwhile, Close Brothers is expanding further into the asset management space through acquisitions, and the company's loan book continues to grow thanks to management's expansion into new markets. In a trading update issued last week, Close Brothers reported its loan book increased by 2.3% to £6.6bn from £6.4bn over the five months to the end of December, or 9.3% year-on-year. Following a £175m issue of tier 2 subordinated debt, the bank's proforma total capital ratio has increased by 2.4% to 15.1%, giving plenty of room for additional loan book growth.

Cutting down

As Close and Metro expand, Barclays is shrinking. During 2015 the bank announced it would axe 30,000 jobs by the end of 2017 and the group is well on the way to meeting this target. Last year as many as 85 employees per day lost their job at the bank while a total of 30 branches around the country were closed for good.

Branch closures, job cuts and falling interest rates are all weighing on Barclays' growth. For the year ending 31 December 2016, City analysts expect the bank to report a 20% decline in earnings per share to 13.3p, down from a high of 38.4p reported for 2012.

Escape velocity

As Barclays shrinks, Metro is growing rapidly. City analysts expect the group to report a pre-tax loss of £16.6m for 2016. But as start-up costs fall and growth reaches escape velocity, analysts are forecasting a pre-tax profit of £32m for 2017 and £88.3m for 2018. Earnings per share are on track to hit 75p by 31 December 2018 according to analysts.

Close Brothers' earnings per share have doubled over the past five years and while growth has slowed, the bank still looks attractive as an investment. The shares currently trade at a forward P/E of 11.6 and support a dividend yield of 4%. The group's pre-tax profit is expected to grow by 7% for the fiscal year ending 31 July 2017.

So all in all, when it comes to growth, both Close Brothers and Metro look to be better investments than Barclays. As Barclays continues to shrink, it may be time to sell the bank and buy one of its faster growing peers.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.